After World War One, the U. S. economy was in a tailspin. In 1921, we had almost 12 percent unemployment and a top marginal tax rate of 73% on million dollar incomes. With such high tax rates, investors didn’t invest and jobless Americans remained jobless. What did the Harding-Coolidge administration do? Over the next five years, they cut tax rates across the board, and within a few years, wealthy Americans paid just 25% on all income over $100,000. What was the result? Rich people plowed their capital back into the American economy. Unemployment dropped to less than 3% and revenue into the federal government actually increased from 1921 into the late 1920s. We had budget surpluses every year and cut over one-fourth off of our national debt. The Roaring Twenties was one of the most prosperous decades for any country ever.
This was a teaching moment in U. S. history. Unfortunately we had some slow learners. Presidents Hoover and Franklin Roosevelt raised tax rates across the board. Revenue declined and unemployment went back up. Fifty years later when President Reagan again made across the board tax cuts, revenue to the government again went up sharply and unemployment declined. He had repeated Coolidge’s tax strategy with the same results.
Fast forward to today. In 2004, the state of New Jersey raised its top marginal income tax from 6.37% to almost 9% on incomes starting at $500,000. What was the result? According to the Wall Street Journal, New Jersey had an outflow of wealthy people and the state’s revenue from wealthy people declined. Most citizens who left New Jersey went to states with lower income and estate taxes. How did New Jersey respond? In 2009, it raised its income tax further to 10.75%. That way, some apparently argued, they could recapture what wealth they lost when they raised taxes in 2004. According to Professor Jim Hughes of Rutgers University, “we’ll probably see a continuation of this trend [outmigration], until there are no more high-wealth individuals left.”
If we want to create wealth, we need to lower tax rates and give free people the opportunity to fulfill their dreams and invent new products, or expand their existing investments, to generate the business boom that will put more Americans back to work.
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